Reform of the nation's welfare system, particularly its welfare-to-work
component, has focused the attention of policy makers, advocates, and the
poor themselves on the low-wage labor market. Indeed, the success of
welfare reform is largely dependent on moving recipients off the welfare
rolls and into market work, which, given the education and skill levels of
the typical welfare recipients, will be work at low
wages.(1) This focus requires a realistic
understanding of the low-wage sector: Can it successfully absorb those coming
off the welfare rolls? What are their hours of work and earnings likely to
be? What impact will welfare-to-work have on the living standards of former
welfare recipients? What will be the impact on their children?

These questions can only be addressed, however, when the low-wage labor market
has been adequately defined, a task that depends on the answers to a different
set of questions: How does the low-wage sector differ from the rest of the
labor market? Who works there? What is the industry/occupation structure
of this sector? Are these characteristics changing? Is it becoming more or
less likely that someone will be a low-wage worker? What policy initiatives
might help low-wage workers? This paper defines and characterizes the low-wage
labor market by addressing such questions.

The main findings of the paper are:

Definitions of the low-wage labor market fall into two basic groups.
Job-based definitions identify a set of jobs characterized by low wages,
few benefits, and little upward mobility. Worker-based definitions
are typically based on a worker's absolute or relative hourly wage, earnings
(wages times hours worked), or educational level. Job-based definitions
provide the theoretical foundation and worker-based definitions, the empirical
basis for study of the low-wage labor market.

Irrespective of definition, there is a strong empirical consensus that there
has been a long-term decline in the real earnings of low-wage workers and/or
an increase in their numbers as a share of the workforce.

These characteristics notwithstanding, the low-wage workforce is becoming
more male and more highly educated, which is to be expected given widespread
educational upgrading and the long-term wage decline among noncollege graduates.

The likelihood of being a low-wage worker has increased, even when the wage
impacts of changes in education, experience, occupation, and industry are
taken into account.

Rising education and experience levels and occupational upgrading have combined
to prevent the share of female workers in low-wage jobs from rising.
This has not been the case for men, even though their total share of the
low-wage workforce is still below that of women.

Supply-side interventions, such as worker training, are clearly important.
Increasing labor demand through policies that keep aggregate unemployment
low  combined with policies that shore up labor market institutions
such as the minimum wage and labor unions  can also help improve
the economic prospects of those in the low-wage sector.

In the most basic economic model of the labor market, there are no identifiable
characteristics that separate the low-wage sector from the rest of the
market. The labor market is one in which a worker's wage is determined
solely by the value of that worker's marginal product  that is,
how much his or her labor adds to the total product of the firm.
Consequently workers with lower productivity are paid less than those who
contribute more to the firm's output. However, more nuanced treatments
of the labor market have evolved over time that provide both a theoretical
justification and an empirical basis for studies focusing specifically on
the low-wage sector of the market. These can be grouped into two major
categories: job-based and worker-based (see table 1).

characteristics of workers in (e.g.) the bottom 20 percent of the wage scale

trends in real wages by percentile

Wage Contours

Employment

groups of jobs with "common wage-making characteristics"

wages in such jobs tend to move together and tend to be tied to the minimum
wage

high levels of unemployment and underemployment among those with "low-wage
profiles"

low rates of employment

marginal labor force attachment

frequent cycling in and out of labor market

Education level

wage trends and workers' characteristics by education level, typically high
school or less

Job-Based Definitions: A Strong Theoretical Foundation

Job-based definitions focus on a set of jobs with characteristics that lead
both to working poverty and reducing upward wage and income mobility.
There are two major variants of this definitional approach: segmented labor
markets and wage contours.

Segmented Labor Markets. The fundamental insight of
this branch of analysis is that jobs are organized into two separate segments
and that there is more labor mobility within each segment than between
them.(2) Jobs in the primary segment are
core jobs. These pay higher wages and are more likely to provide fringe
benefits (such as health insurance and paid vacations) than jobs in the secondary
segment. They also have ladders upward (often within the same firm),
whereby workers can steadily improve their earnings and living standards
over time. Jobs in the secondary segment, on the other hand, are peripheral
jobs. They pay low wages, offer few benefits, tend to be nonunion,
and generally have worse working conditions than core jobs in the primary
sector. They are also less stable than core jobs, with high job turnover
and much churning but little upward mobility. Race- and gender-based
discrimination are also more common in the secondary than in the primary
segment.

Wage Contours.(3) The
primary insights here are (1) that there are groups of jobs that share
characteristics that together lead to wage levels within an identifiable
range, and (2) that wages in these groups of jobs move, over time, in a related
manner. The group of jobs on a contour defined by the minimum wage
provides a good example.(4) These jobs
tend to be in low-wage industries like retail trade and personal services
and in occupations like low-end sales, administrative support, and other
service occupations. Workers on the minimum wage contour tend to be
the traditional victims of labor market discrimination and have suffered
most from declining real wages over the past 15 years.

Job-based definitions provide a compelling conceptual structure within which
to understand the low-wage labor market. They offer a rich model of
the determinants of wages and employment, which, unlike traditional labor
market theory, can incorporate the role of labor market institutions (such
as unions, minimum wage legislation, and international trading regimes),
along with established power dynamics (such as race- and gender-based
discrimination).

Their very richness, however, makes them difficult to use in empirical
analysis. Few available data sets have the level of job-based information
needed for such analysis. Since worker-based definitions are more
empirically tractable, and since the job-based approach yields empirical
results that mirror those based directly on a worker-wage definition (discussed
below), the greatest contribution of the job-based approach is the solid
and innovative theoretical grounding it provides for the empirical work on
the low-wage labor market as defined by worker characteristics.

Worker-Based Definitions: The Primary Basis for Empirical Work

The set of definitions more typically seen in contemporary research on the
low-wage labor market focuses on the characteristics of workers (or potential
workers) themselves  such as wage level, earnings and hours worked,
or skill level.

Wage Level. Defining the low-wage labor market by
the wages of its workers is clearly tautological. Even so, it is certainly
reasonable to define, or at least discuss, the low-wage labor market by referring
to the wage level itself. After all, the definition one chooses will
correlate strongly with low levels of compensation if it is to be useful.
And looking at the other characteristics of persons who work for low wages
can tell us quite a bit about who the low-wage worker is likely to be.

The disadvantage of a simple wage-based approach is that it treats all workers
who happen to be receiving low wages at a given point in time as similar,
which covers up the important issue of differential labor mobility.
A college student in a low-wage job, for example, is typically of much less
policy concern than a single mother stuck indefinitely in a dead-end job.

This is a less-severe problem than it first appears, however, and can be
alleviated by taking snapshots of the wage distribution at different points
in time. Such snapshots allow comparisons of the different characteristics
of workers at different wage levels. Unless the rate of mobility (that
is, the speed with which workers move up the wage distribution) changes,
comparing snapshots over time presents a useful description of the conditions
of the low-wage sector and the characteristics of those who work there.
For example, as discussed further below, declining real wages in the low-wage
sector have led to increasing shares of the workforce being in low-wage jobs
over time, and these workers are older and more highly educated than their
predecessors. Unless older, better-educated workers that start out
earning low wages are jumping ahead more quickly than in the past 
and there is actually evidence to the contrary  these findings
imply that the low-wage sector has truly expanded and includes older and
better-educated workers.

The Absolute Wage Approach. The easiest wage-based
definition to understand and interpret is an absolute measure. Analysts
look at the share of the workforce in the same real wage range in different
years and observe both the characteristics of workers and the proportions
of workers within those ranges at particular points in time. A common
way of determining such wage ranges is to use the U.S. standard poverty level
as a reference and dividing the wage distribution by multiples of the wage
rate derived from that level. Table 2, for example,
divides the poverty level for a family of four ($16,400 in 1997) by 2,080
hours (52 weeks of work at 40 hours a week) to derive an absolute wage-level
cutoff for the low-wage sector of $7.89 an hour. Using the poverty
level for a family of three would yield a correspondingly lower wage-level
cutoff for that sector.(5) The table then
shows comparisons between that sector and two higher wage ranges defined,
respectively, as wage levels between the poverty-level wage and twice that
level, and wage levels above twice the poverty-level wage.

Besides being easy to interpret, the absolute measure has the advantage of
facilitating comparisons of absolute living standards (that is, real consumption
opportunities) between low-wage and other sectors. It is, of course,
sensitive to how price changes over time are measured. Any bias in
the Consumer Price Index, for example, will be reflected in a corresponding
bias in absolute wage rate comparisons. Any absolute measure is also
unavoidably arbitrary. This weakness can be alleviated by doing sensitivity
tests. These tests, by replicating the calculation for wage levels
around the central choice, show how sensitive the results are to the particular
wage level chosen.

The Relative Wage Approach. The danger of bias from
measured prices failing to accurately reflect changes in real living standards
is removed if the wage-based definition uses a relative approach, for example,
by referring to the bottom 20 percent of the wage distribution. This
definition has intuitive appeal because all would agree the bottom 20 percent
are worse off relative to the top 20 percent, for example. The downside
of relative measures is that they are not as rigorously tied to changes in
living standards as absolute measures. Thus, the living standards of
relatively low-wage workers  those in the bottom 20 percent,
say  could rise markedly if real wages rose throughout the
distribution, yet they would still be classified as low-wage workers.
In other words, this approach allows for no change in the proportion of the
workforce that is defined as low wage.

* Wage ranges are multiples of the poverty level
for a family of four divided by full-time, full-year work (see text).** Refers to union membership, excluding nonmembers
who are covered by collective agreements.

Source: 1997 CPS ORG

One way to solve this problem within the relative framework is to define
low earnings as a fraction of the median
wage.(6) This measure will move with the
median (a relative measure), but it allows the share of workers who fall
into the low-wage category to vary over time. Again, however, an increasing
median (implying increasing multiples of the median) would mean that at least
some in the low-wage category will increase their standards of living over
time.

Another limitation of the hourly wage level definition is that it fails to
account for the possibility that workers may not work enough hours to meet
their families' economic needs. Even if the wage structure were to
rise high enough for workers at all wage levels to be able to support their
families if they worked full-time/full-year, there is still the issue of
whether enough hours of work are available in the low-wage sector.

Earnings/Hours Worked/Time Employed. The problem of
work availability is very real for the low-wage sector. There is
considerable evidence that disadvantaged workers (for example, workers whose
personal characteristics are correlated with low earnings or incomes) experience
higher levels of unemployment or underemployment than those with characteristics
associated with higher earnings, even when the economy is strong.
Furthermore, the share of persons with low-wage characteristics (such as
young, less-educated minorities) who fail to participate in the labor market
has increased over time.

To take this factor into account, analysts use definitions based on a variety
of measures of time working. Blank (1994), for example, looks at the
unemployment of family heads and finds that in 1991 (a business cycle trough),
40 percent of the reported weeks of unemployment by family heads occurred
in the bottom 20 percent of the income distribution. Another approach
looks at weeks unemployed and weeks out of the labor market
altogether.(7) This approach has found
that between the late 1960s and the late 1980s, the largest deterioration
occurred among workers in the bottom 10 percent of the wage distribution.
Yet another variant looks at employment, unemployment, and
underemployment.(8) This approach reveals,
for example, that in 1996-97, when the national unemployment rate was 5.2
percent, it was 19.7 percent for young (ages 16 to 25) African American women
with a high school degree.

Results like these imply that, even in periods when wage levels are rising,
low-wage workers will often not be able to work enough hours to fully meet
their economic needs. Furthermore, they suggest that comparisons of
the share of the workforce that is in the low-wage sector over time will
progressively underestimate the size of the low-wage workforce. This
is because the share of the potential low-wage workforce that is out of the
labor market is not counted in the comparison because they earn no wage at
all.

Education. A measure of the low-wage sector that does
not depend on actual wage or earnings levels, although highly correlated
with them, is education level. Low-wage workers are often those with
a high school degree or less.

This approach has some intuitive appeal, particularly since the wages of
those with college degrees increased sharply over the
1980s(9) while the wages of those with a high
school degree or less fell steeply. But it has two limitations.
First, as of 1997, the "high school or less" definition included 44.3 percent
of the workforce.(10) Even avid critics
of the U.S. labor market might be hard pressed to argue that such a large
share of the workforce was "low-wage" or "low-skilled." Second, as
with the relative wage approach, the sector of workers defined as low wage
by the education approach will not change, even if rising real-wage levels
in fact increase their standards of living.

Thus, there is a range of worker-based definitions of the low-wage labor
market, each with its own strengths and limitations. Together they
provide a portrait of the low-wage labor market and the workers in it, from
which potentially useful policy conclusions can be drawn. The next
section of the paper lays out the characteristics of low-wage workers, defined
as workers who earn poverty-level hourly wages or less. This is followed
by a discussion of how the low-wage labor market sector, variously defined,
has been changing and the factors that have led to these changes.

A useful way to begin a statistical description of low-wage workers is with
the poverty-level wage approach described in the previous section.

Table 2 shows the characteristics of U.S. workers in
1997 by wage range. The low-wage sector (column 1) is defined as those
who earn $7.89 an hour or less  $7.89 being the hourly wage of
someone who, if they worked 40 hours a week, 52 weeks a year, would have
annual earnings equal to the 1997 poverty line for a family of four.
The medium-wage sector (column 2) is defined as those who command wage rates
that would put them between the poverty line and twice the poverty line if
they worked full-time/full-year in 1997 ($7.90 - $15.78). The high-wage
sector ($15.79 and above) is defined as those who command wage rates that
would put their annual income above twice the poverty line if they worked
full-time/full-year in 1997.

Table 2 holds no real surprises. Compared to the
overall workforce, low-wage workers are more likely to be women, minority,
noncollege-educated, nonunion, in the retail trade industry, and in low-end
sales and service occupations.

The top panels in this table (1A and 1B) present average wages and the share
of workers in each wage sector, by gender. For workers in the low-wage
sector, the average hourly wage in 1997 was $5.92, about 44 percent of the
average wage of the workforce as a whole. For women, the low-wage share
of the workforce was 35.3 percent, about 12.8 percentage points higher than
the low-wage share for men and about the same as the high-wage share for
men. Clearly, by this definition, the low-wage sector consists of a
nontrivial share of workers.

The rest of the table shows the shares of workers with particular characteristics
within each wage range. Panel 2 shows that the majority of low-wage
workers (58.8 percent) are women. Comparing the shares of the sexes
in the different wage sectors with those in the total column reveals the
extent to which workers in different wage sectors are disproportionately
represented in the total labor force. Women, for example, constituting
47.7 percent of the total, are over represented in the low-wage sector.
Minorities are also over represented in that sector. The share of
Hispanics, for example, is 17.2 percent, compared with their 10.5 percent
share of the labor market overall. Whites are the only racial group
under represented in the low-wage category (63.0 percent versus 73.6 percent
overall).

With respect to age (panel 4), workers in the low-wage sector are younger
on average than in the more highly paid sectors. Just over 60 percent
of low-wage workers average 35 years of age or less, compared with about
40 percent of the high-wage workers.

Education levels (panel 5) are relatively low for the low-wage sector.
Nearly two-thirds have a high school degree or less, compared with under
one-half of the medium-wage group and about one-fifth of the high-wage
group. Virtually no high-wage workers have less than a high school
degree. Figure 1 highlights the same information
for the low-wage and high-wage groups. Over half of the high-wage group
have a college degree or more, for example, compared with less than one-tenth
of the low-wage group. Almost four-fifths of the high-wage group have
at least some college, compared with just over one-fifth for the low-wage
group.

By far the most populated industrial category for low-wage workers is retail
trade, accounting for almost one-third of the low-wage workforce. Low-wage
workers, in contrast, are under represented in the industries typically
associated with higher-quality jobs for noncollege-educated workers, such
as manufacturing, mining and construction, and transportation and utilities.

For occupational categories, low-wage workers are disproportionately represented
in low-end services occupations ("other" services include such occupations
as food and cleaning services) and sales (such as cashiers and other sales
jobs in retail). Finally, low-wage workers are much less likely to
be members of unions than their higher-wage counterparts. Only 5.7
percent of the low-wage group are in unions, for example, compared with 15
percent in the medium-wage group, 22.7 percent in the high-wage group, and
14.5 percent in the workforce as a whole.

A limitation of the definitional approach to the low-wage labor market taken
in table 2, as noted, is that it compares workers as if they all worked
full-time/full-year, which ignores that fact that many in low-wage jobs do
not work as many hours as they would like. Figure 2
shows the share of poor families with children that have at least one
full-time/full-year worker. In 1997, less than one-quarter of poor
families had such a worker, a slightly higher proportion than in previous
decades.

Source: Authors' analysis of March CPS data.

Another potential limitation of table 2's approach is
that it shows pre-tax, pre-transfer income, which is different from the amount
of disposable income available to such a family. At the average wage
rate for women in the low-wage labor market of $5.86 an hour in 1997, for
example, a woman who worked full-time/full-year would have had a pre-tax
income of $12,200. When the Earned Income Tax Credit, the cash value
of food stamps, federal and state tax payments, and uncompensated work expenses
(including child care) are incorporated into the calculation, this woman's
family would end up with a slightly higher ($13,231) income to
spend.(11)

To put the 1997 picture of the low-wage labor market into a broader perspective,
figures 3 through 6 look at trends over the 1973-97 period from a variety
of perspectives. Whichever perspective is taken, the story is essentially
the same. Real wages have fallen for the low-wage sector of the labor
force.

Wage-Rate Perspective.Figure 3
shows the share of workers earning poverty-level wages or less, by gender
(the 1997 figures are the same as those in table 2, panel B, column 1).
The middle line shows a rising trend for all workers, from 23.7 percent of
the workforce in 1973 to 28.6 percent in 1997. This trend, as discussed
in more detail below, has been driven exclusively by men. Women workers
are still more likely to be in the low-wage sector than men, but their
probability of being there has actually declined slightly over the last 25
years.

Employment/Hours Perspective.Figure
4 shows the trend in the proportions of persons, in families with children,
who worked full-time/full-year and still had annual earnings below the poverty
line for a family of four. Their share increased about 4 percentage
points between 1979 and 1989. This is consistent with the trend in
figure 2, which shows an increase since 1979 in the share of poor families
with children that have at least one full-time/full-year worker. A
greater share of female-headed than male-headed poor families with children
had at least one full-time worker throughout this period. This share
fell during the 1970s, grew 4 percentage points in the 1980s, and has been
flat in the 1990s. By 1997, one-quarter of female-headed families with
children had a full-time worker with poverty-level earnings.

Figure 4. Persons in Families with Children,
Who Work Full-Time/Year-Round and
Have Annual Earnings at or below the Poverty Level, 1969-97.

SOURCE: U.S. Bureau of the Census (1992) and unpublished
data.

Education Perspective.Figure 5
shows the trend in real hourly wages for workers with a high school education
or less by gender for the 1973-97 period. The real hourly wages for
men and women with less than a high school degree fell by 30 percent and
16 percent, respectively, over this period. For high school graduates,
real hourly wages fell by 17 percent for men, but by only about 3 percent
for women.

Figure 5. Average Real Hourly Wages of Men
and Women with a High School Degree or Less, 1973-97, Indexed to 1979

Relative Wage Perspective.Figure
6 shows real hourly wages for both men and women in the 10th and 20th
percentiles of the wage distribution. For men and women in the 10th
percentile, and for men in the 20th percentile, real wages fell by 16 to
18 percent. For women in the 20th percentile from the bottom, the picture
was somewhat less discouraging. They suffered a real wage drop of only
7.6 percent.

Figure 6. Real Wages for Men and Women in
the 10th and 20th Percentile of the Wage Distribution, 1973-97, Indexed to
1979

Shifts in Worker Characteristics over Time.Table 3, which takes the same measurement approach as
table 2, examines changes in the characteristics of low-wage workers.
Over the roughly 25-year period, the average real wage of the workforce as
a whole remained virtually unchanged. Within this overall wage stability,
however, there were substantial differences by wage sector and sex.

* Wage ranges are multiples of the poverty level
for a family of four divided by ull-time, full-year work (see text).** Since the 1979 CPS does not carry the variables
necessary to determine union membership, the trends in union membership shown
here are for 1978-97.

The low-wage sector lost substantial ground (real wages falling by over 7
percent). The middle-wage sector lost only slightly more than the workforce
as a whole. The high-wage sector gained considerably (9.4 percent increase
over the period). Wage growth was strongest for women, with real wage
rates growing by almost 13 percent over the period. Within this overall
average, however, women in the low-wage sector lost ground (with their average
wage rate dropping by 8 percent). Men lost ground overall, as did men
in low-wage and middle-wage sectors. But the high-wage men gained almost
as much as the high-wage women.

With respect to workforce, employment in the low-wage sector grew by 4.9
percentage points. Within this average, the share of men that are in
the low-wage sector grew by over 9 percentage points while the share of women
that are low-wage remained virtually unchanged.

The rest of table 3 shows the changing characteristics
of workers within each wage group overtime. Like the rest of the workforce,
the low-wage sector included more minorities and became older, more highly
educated, and less likely to work in the manufacturing industry. Unlike
the rest of the workforce, however, the low-wage sector included less
women. Women made up an additional 4.3 percentage points of the total
workforce, while their share in the low-wage group fell 9 percentage
points. The "high school or less education" category declined by 13.5
percent.(12) It may seem surprising that,
in a period when the economic returns to education were rising (particularly
over the 1980s), a larger share of those earning low wages were better educated
at the end of the period than at the beginning. But this is the unavoidable
outcome of long-term educational upgrading combined with long-term wage
decline. Between 1979 and 1997, for example, the share of the workforce
with less than a high school degree fell from 20.1 to 11.1 percent.
In the absence of this educational upgrading, even larger shares of men and
women would have been in the low-wage sector in 1997.

By industry, low-wage workers became less likely to work in manufacturing
and more likely to work in low-wage services like retail trade and "temporary"
office services. The occupational shifts within the low-wage sector
were primarily a 7.6 percentage point increase in the share of the low-wage
sector employed in sales and an 8.4 percentage point drop in the share employed
in clerical jobs (compared with an overall drop of 4.5 percentage
points in the share employed in clerical occupations).

The discussion so far makes it clear that the probability of being a low-wage
worker has increased, an increase that has been driven by an increasing share
of men in the low-wage sector. In addition, the low-wage workforce
has become more highly educated but has seen falling real wages. This
section addresses some of the reasons behind these changes. The findings
discussed are based on a statistical technique called regression analysis,
which allows the contribution of different causal factors to be distinguished
from one another.(13) Thus, the impact
of changes in the economic returns to education, experience, occupation and
industry can be separated from the impact of changes in the characteristics
of the workforce, and from the impact of the changes in the likelihood of
being in the low-wage market.(14)

Disentangling Impacts. Using education as an example
helps to explain why it is important to disentangle the contributions of
these three separate sets of factors, all of which have caused the low-wage
sector of the labor market to grow. If the likelihood of being a low-wage
worker falls over time, it might be because the education premium increases
(that is, the extra earnings that come with additional education, say, being
a high school graduate rather than a high school dropout, increase).
In this case, the share of low-wage workers would fall even if the educational
characteristics of the low-wage workforce remained unchanged. But what
if the economic returns to education remained the same but the characteristics
of the workforce improved (that is, a larger share of the workforce went
to college)? In this case, the low-wage share of the workforce would also
fall, but the cause would be different. It is also possible for the
low-wage share to fall, even if the returns to education and the
characteristics of the workforce remained unchanged, because of structural
changes in the economy and/or institutional changes in the labor market.
The next section discusses the relative importance of changes in the economic
returns to work, in the characteristics of the workforce, and in the structural
and institutional factors in explaining trends in the low-wage labor market
over the past 25 years.

The Findings. Changing returns to work, other things
equal, have lowered the probability of being in the low-wage sectorfor both
men and women. Worker characteristics  educational and
experience upgrading for men and women and occupational upgrading for women
generally  have also lowered the probability of low-wage work,
other things equal. Yet, the probability of low-wage work increased
for the overall workforce. How can we explain this apparent riddle?

The answer is that the probability of low-wage work increased within
groups of workers narrowly defined by age, race, education, occupation, and
industry.(15) Even after controlling for
changes in all of these characteristics and their returns, we are still left
with the secular increase in the probability of low-wage work.

What would have happened if there had been no changes in the economic returns
to work or workforce characteristics? The probability of being in the low-wage
sector would still have increased for both sexes, but the increase would
have been much larger for men than for
women.(16)

Various changes in the structure of the U.S. economy and labor market account
for the increased probability of a worker being in the low-wage sector,
irrespective of changes in the economic returns to work and the characteristics
of the workforce. Explanations fall into two general camps: (1) a shift
in labor demand against low-wage workers, driven by globalization and
technological change, and (2) erosion of the institutions that used to bolster
the economic conditions of the low-wage
sector.(17)

Labor Demand Shift. The demand-shift argument interprets
the sharp increase in educational returns over the 1980s as evidence that
the demand for labor has shifted against the low-skilled worker. This
shift, in turn, is due to an increasing mismatch between the skills these
workers bring to the labor market and the skills employers seek, according
to this argument. There is some evidence to support the demand-shift
argument, particularly for workers at the very lowest skill
level.(18) But this cannot be the complete
explanation, for several reasons. First, it fails to account for the
increasing share of the workforce in the low-wage sector, irrespective of
educational change. Second, wages have fallen for some groups of workers
at all levels of education (even though the fall has been sharpest
for the least educated).(19) Third, if
a labor demand shift were the complete explanation, one would expect to find
persistent increases in the returns to education combined with declining
employment opportunities for low-wage workers. But neither is true
in the current economic recovery. Returns to education have significantly
slowed for both men and women. Furthermore, low-wage employment,
particularly at the low end of the service sector, has been growing quickly
over this economic recovery, and the Bureau of Labor Statistics projects
that some of the largest sources of future job growth will be in the low-wage
categories (such as cashiers, retail sales workers, and low-wage clerical
workers).(20)

Eroded Labor Market Institutions. This argument holds
that a set of labor market institutions that have historically bolstered
the wages of those in the low-wage sector have weakened in their protective
role. Such institutions include minimum wage laws, unions, monetary
policy, and trading regimes that protected jobs in favored industries.
The real value of the minimum wage has fallen. Unbalanced trade in
manufactured goods has expanded. The Federal Reserve has kept the
unemployment rate at specific targets set to keep inflation down rather than
employment up. All these factors have, indeed, reduced the ability
of low-wage workers to keep their wages ahead of inflation.

So, low-wage workers are being hurt in the current economy not only by weak
labor demand for the least skilled, but also by the eroding of institutions
that have historically protected them. In the current debate, however,
the weak demand explanation has received most of the attention. The
eroding institutions argument has received short shrift given its importance.

Workers with higher skills are always less likely to be low-wage workers
and, in this regard, policies that stress skill upgrading are sure to be
helpful. But the findings reported here show that the low-wage share
has become better educated over time  and that this educational
upgrading has failed to lower the share of low-wage workers because of real-wage
declines even within education categories. Thus, skill
improvements alone will not solve the problem of the increasing share of
the workforce in the low-wage sector, particularly in the short and medium
term. The steady increase in the likelihood of low-wage work 
irrespective of changes in the economic returns to work and the characteristics
of the labor force  makes a powerful case for policies that improve
the demand side of the labor market, address the erosion of labor market
institutions, and supplement the earnings low-wage workers can command with
wage and income supports.

Increasing Labor Demand. The post-1996 period of the
current economic recovery provides excellent evidence that increasing the
demand for low-wage workers can play an important (and underappreciated)
role in raising the wage levels and employment opportunities of low-wage
workers. Persistently low unemployment rates have led to dramatic real
wage gains for low-wage workers.(21) And
the tight labor market has led to historically large declines in the unemployment
rates of disadvantaged workers who have been left behind in prior economic
recoveries. Between 1996 and the first half of 1998, for example, the
overall unemployment rate declined by 0.9 of a percentage point, to 4.5
percent. But the unemployment rates for workers traditionally lower
down in the hiring queue declined more than the average  a 1.5
percentage point drop for African Americans, a 2.0 point drop for Hispanics,
and a startling 3.5 point drop for young (ages 18 to 35) minority high school
graduates (a particularly disadvantaged group).

This suggests the need to rethink the question of when wage growth threatens
to become inflationary, in the sense of triggering ever-increasing price
growth. Conventional wisdom held that inflation would begin to
spiral upwards with the unemployment rate pegged at 6.0-6.5 percent.
This parameter guided Federal Reserve monetary policy through much of the
1980s and 1990s, with low-wage workers suffering as a result. But the
recent sharp decline in the unemployment rate to 4.5 percent 
with no accompanying acceleration of inflation (indeed, inflation is also
at a historic low)  has taken the unemployment rate as a key indicator
into uncharted territory. The evidence is quite clear about the
distributional consequences of the unemployment/inflation tradeoff.
Declines in unemployment are more beneficial to lower-income families, whose
wages are more sensitive to labor market tightening. Inflation at modest
levels does more damage to those at the top of the income scale. (Spiraling
inflation, obviously, hurts everyone).(22)

Strengthening Labor Market Institutions. Minimum wage
law and union membership are the major factors at issue here. The general
consensus is that the declines in the real minimum wage and in union membership
explain up to two-fifths of the increase in wage inequality since the
1970s.(23)

The minimum wage has played an important historical role by providing a wage
floor below which employers could not set wage rates. This floor is
particularly important for female workers who, as already noted, represent
close to 60 percent of minimum wage workers. In recent years, the 10th
percentile of the female wage distribution has, for all practical purposes,
been set by the legal minimum. Thus, the fall in the minimum wage of
30 percent in real terms over the 1980s played a major role in both the expansion
of low-wage work and the increase in wage inequality, particularly among
women. Here again, the conventional wisdom among economists has
changed. It was generally held that increases in the minimum wage led
to job loss among the low-wage workers it was supposed to protect.
But now a growing body of empirical research has shown that this is not true,
at least for increases of the magnitude implemented in the United States.
The most recent 90-cent increase, for example, lifted the earnings of low-wage
workers without leading to job losses.(24)

Unions have also played a historical role in the labor market, increasing
the bargaining power and compensation both of their members and of workers
outside the unionized sector. As with the decline in the minimum wage,
empirical research has identified the decline in union membership among the
workforce as an important contributor to the increase in wage inequality.
As noted earlier, low-wage workers have historically been under represented
by labor unions. However, recent efforts to organize low-wage service
workers do look promising.

Wage and Income Supports. A stated goal of welfare
reform is to make work pay.(25) One policy
that has been implemented to increase the wages of low-wage workers beyond
what they command in the market is employer-based wage subsidies. The
problem with this approach is that, as the minimum wage literature has pointed
out, the demand for low-wage labor is relatively insensitive to changes in
its price  implying that large employer-based wage subsidies will
be required to generate the desired increase in employment, and that the
negative trends over the past few decades have made such an approach ever
more expensive. Nevertheless, certain approaches have had some success,
particularly those that are combined with training and job
development.(26)

An employee-based wage subsidy  such as the Earned Income Tax
Credit  is generally considered a more effective way to subsidize
work. Transportation and child care subsidies will also help, by directly
raising the spendable incomes of low-wage working families.

The advent of welfare reform, with its emphasis on welfare to work, has led
to an increased interest in the low-wage labor market. Such interest
is well-served by examining the ways in which labor market analysts have
defined the low-wage labor market in prior literature. A typology has
been applied in the previous sections, drawing both on the early work of
segmented labor market theorists as well as that of more contemporary empirical
analysts.

Then some of the wage-based definitions were applied, which showed that under
each definition wages and earnings have fallen for these workers. Examining
the characteristics of low-wage workers (defined using absolute wage levels)
reveals few surprises: such workers are disproportionately female, minority,
with at most a high school degree. Over time, the share of women in
the low-wage workforce has declined, and low-wage workers are better educated
now than in the past. In addition, the likelihood of low-wage work
has increased over time, driven by an increase in the number of men in this
segment of the workforce. The low-wage share of female workers would
have grown significantly had women not upgraded their education, experience,
and occupations. However, even after controlling for changes in both
returns and characteristics, there has been a large, secular increase in
the likelihood of work at low wages.

Explanations for the increase in low-wage work stress both a shift in labor
demand against low-wage workers and the erosion of labor market institutions
which, in prior years, served to increase the earnings of such workers, both
in relative and absolute terms. Both of these explanations have some
validity, but concerns regarding eroding institutions get too little attention
relative to the demand-shift arguments. Policies can be designed to
both increase demand for low-wage workers and reinvigorate key institutions.

Blank, Rebecca M., and Alan S. Blinder. 1986. "Macroeconomics, Income
Distribution, and Poverty." In Fighting Poverty: What Works and What
Doesn't, edited by Sheldon Danziger and Daniel Weinberg. Cambridge,
Mass.: Harvard University Press.

Topel, Robert. 1993. "What Have We Learned from Empirical Studies of Unemployment
and Turnover?" Paper presented at the 105th Annual Meeting of the American
Economic Association, Anaheim, Calif., January 5-7.

U.S. Department of Commerce, Bureau of the Census. 1992. Workers with
Low Earnings: 1964 to 1990. Series P-60, No. 178. Washington, D.C.:
U.S. Government Printing Office. Unpublished updates provided by Jack McNeil
of the Census Bureau.

Data and Methods

Wage Data: The wage data for tables 2, 3, and A1 come
from the Outgoing Rotation Group (ORG) files of the Current Population Survey
(CPS) for 1979-97. The sample includes all wage and salary workers, ages
18 to 64, with positive hourly wages between $0.50 and $100 in 1989 dollars.
For hourly paid workers, the reported hourly wage is used; for weekly workers,
the hourly wage is constructed by dividing usual weekly earnings by usual
weekly hours. Top-coded weekly earnings were replaced with the estimated
value of the mean weekly salary above the top code, using the assumption
that the upper "tail" of the distribution follows a Pareto format. Quantile
estimates, such as those shown in figure 6, use a smoothing procedure to
accommodate "clumps" in the reported distribution of earnings. The construction
of this wage series is discussed in greater detail in Webster (1999).

Table A1, Oaxaca decomposition: The wage data for this table also come
from the CPS ORG, as described above. We use the following equation to decompose
the changes in characteristics (Xs) and returns (Bs):

where p is the change in the probability of low-wage work (in our
case, the change in the likelihood of earning less than $7.90 in 1997 dollars),
B bar is the average of the returns between the two time periods, X
bar the average of characteristics between the two time periods, a
the intercept term, and I indexes the independent variables, 1 through
k. Variables in the regression include education, potential experience
(age-education-6), industry, occupation, race, region, and marital status.
The regressions use the CPS ORG population weights, and separate equations
were estimated for men and women.

Thus, the first term represents that part of the change attributable to changing
characteristics, the second term represents that part of the change attributable
to shifts in returns, and the third term captures the change in the
intercept.(27)

5. All the poverty-level wage calculations in this
paper refer to the poverty-level wage for a family of four. Using the
poverty-level wage for a family of three does not change the qualitative
or quantitative results.

6. Organization for Economic Cooperation and Development
(OECD) (1997) defined the low-wage cutoff as two-thirds of the median wage.
Interestingly, the OECD finds no evidence of higher mobility among low earners
in the less-regulated United Kingdom and United States compared to other
countries in its study.

11. This family would have been ineligible for health
coverage under Medicaid in 1997. Subsequent program changes have now
made the children in such a family eligible for Medicaid coverage, raising
the family's living standard a bit higher (Currie and Yelowitz 1998).

12. This comparison involves crossing the coding change
in the Current Population Survey (CPS) education variable. The education
category that changed the most was "some college." Those who had completed
13 to 15 years of schooling in pre-1992 files were labeled "some college."
The new coding differentiates between those with associate degrees and those
with some college. Since these are percentages that together cover
everyone, the coding change only introduces error to the extent that those
with high school or less would have been classified differently under the
two coding schemes. Evidence from the 1990 CPS, which includes both
coding formats, suggests a coding-induced shift from high school to some
college  making the changes shown in table 3 overestimates of
the educational upgrading that took place over the period.

14. The economic returns and the workforce characteristics
may in fact affect each other to some degree, but not enough to change the
nature of the broad trends discussed in this paper.

15. Evidence for this is seen in the increase in the
intercept term shown in appendix, table A1.

16. The combination of the findings for women are
particularly worth noting. The net effect of declining economic returns
to work and the negative structural factors would have led to a 4.9 percent
increase in the share of the female workforce in the low-wage sector between
1979 and 1997. But their actual share in the low-wage sector fell over the
period, by 1.8 percent. Thus, improvements made by women in education,
occupation, and experience more than reversed the impact of the negative
factors.

17. A recent example of the demand-shift argument
was made by Johnson (1997). Institutional arguments can be found in
Fortin and Lemieux (1997), Howell (1997), and Mishel et al. (1999a).

19. For example, the real wages of entry-level (one
to five years' experience), college-educated workers fell by about 7 percent
for both men and women during the 1989-97 period (Mishel et al. 1999a).

20. Of the 10 occupations projected to add the most
jobs over the 1996-2006 period, 7 call for high school or less in terms of
skill demands, and 5 are in the lowest pay category (Silvestri 1997, table
4).

24. See Bernstein and Schmitt (1998). A policy
related to the minimum wage is the living wage movement, which has been
successfully passed in ordinances in numerous cities enforcing pay levels
above the minimum for workers in firms with city contracts (Bernstein 1998).

25. As with immigration, various analysts have argued
that the welfare-to-work component of welfare reform has the potential to
further increase the supply of low-wage workers.